International Expansion Considerations - Madison International Company - Case Study Example

Running Head: INTERNATIONAL BUSINESS International business Name Institution Date Table of Contents Running Head: INTERNATIONAL BUSINESS 1 Name 1 Table of Contents 2 Archibald, J. (2008).Theory and Practice of International Commerce 13 14 1.0 Executive Summary Madison International Company is considering expanding its market after inventing a new revolutionary surf ski. The Spanish market is perceived to be a strategic region of expansion. The most appropriate strategy is to device a wholly subsidiary in Spain. Various issues in the international business sector have been evaluated basing the various theories and concepts. The out come of the analysis basically highlights that foreign direct investment can be best undertaken using a wholly subsidiary strategy. 1.1 Introduction Madison International Company is a company that has proven its inventory capacity after devising a new revolutionary Surf ski that has outdone all the existing Surf skis on the Australian market. The organization has already undertaken its operations and new inventory to various regions of the Australian market. The business was incorporated in 2008 in Melbourne city and has managed to set up various branches in other parts of the country including Sydney. During the initiation the business was basically set up on measures of being an international organization, therefore it is vital to undertake international expansion plans that can actually increase the competitive advantage of the enterprise. 1.3 Purpose of the Report The objective of this particular report is to analyse the various strategies that the organization can utilize for the purpose of responding to international business issues. I believe that our newly invented Surf Ski can provide a very lucrative market for our international operations. Therefore future expansion plans in regions such as Spain will not be that difficult due to the fact that our product speaks for itself. Furthermore the report seeks to evaluate the most suitable international expansion strategy between export, licensing and a wholly subsidiary system. 2.0 International expansion Considerations Spain is one of the strategic countries in Europe that can facilitate easy market expansion specifically to other European countries. The country has succeeds in enhancing economic liberalization which is a characteristic that can facilitate the entrance of our product to this particular country and also other European countries. For instance it would be easy to penetrate the Portugal and French market due to the bilateral relations that exist between Spain and each of the two countries .In addition the country is also one of the main EU selected areas for enhancing international trade (Gillespie 12). The relationship that exists between Latin American countries and Spain is actually well grounded. Spain has tried to maintain a specific identification with Latin American countries. For instance through the Hispanidad which is a mixture of cultural, linguistic, historical and religious ties that bind Latin America and Spain. Spain is also a full member of Latin Union together with other Latin American countries. Relations between Spain and Latin American countries such as Venezuela, Argentina, Brazil and Chile are quite good. Spain will therefore be a considerable good position for putting in our investment and expansion strategy. 2.1 Aspects of foreign direct investment The revolutionary surf ski can best be presented to foreign markets through foreign direct investment in terms of a wholly owned subsidiary in Spain. In despite of the fact that the limitations of this particular strategy have been highlighted for instance, a wholly owned subsidiary would result to effects such as technological spillovers. Whereby if we undertook the wholly subsidiary strategy to Spain, other firms may benefit from the knowledge of our newly invented surf skis, without even incurring the cost we undertook in order to develop our product. The overall impact is that we would have lost our competitive advantage within the international market in Spain. However I believe that undertaking the strategy would be much more profitable for our organization in terms of market expansion. 3.0 Analysis of Licensing and Export Strategies for International Market expansion When trying to make an evaluation of the export and licensing forms of transactional structures for export business, there are various factors that basically underestimate the two strategies. Exportation has its advantage especially for manufactures that is the manufacturer of the product does not have to export the product using their organization they are relieved off this particular burden. The transaction is undertaken through the mediation of the export commission. The advantage here is that the manufacture can then concentrate on other technical parts of the enterprise instead of worrying about how to market the product. However the Wolf (98) highlights that the use of mediation through the export house or the export commission is actually a financial burden to the manufacture, as much as the business may receive its payment from the exporter, the exporter assumes most of the risks which are further transferred to the business, as a result the business may attain lower earning. The mediation exporter frequently causes financial burdens to the exporter for instance if the mediating exporter chooses to give credit on the product the losses incurred would be directed to the manufacture. Exporting needs a relatively lower capacity or level of investment as compared to other modes of international expansion. However the lower risks attached to level of investing do actually result to a usually lower rate of return of the sales made by an organization as opposed to the other means of external expansion. Generally the return gotten from export sales may actually not be very tremendous (Wolf 98). Engaging in export gives a chance to mangers to exercise the aspect of operational control however it does not give them much opportunity in terms of market control. It is thus evident that if we can not have market control over the invented surf ski then the business will not get the required gains associated to our extraordinary invention. This gives a clear perspective of the negative side of venturing into exports. Licensing on the other hand entails formulation of a contractual agreement whereby a firm licences the rights to certain technological, intellectual property and design. Licensing provides a firm with a chance for rapidly enter the foreign market thus no capital requirements are needed to establish manufacturing operations abroad, as undertaken by the subsidiary system. However the disadvantage linked to licensing is that it involves the lack of control over aspects such as marketing, control over quality and manufacturing. Another basic advantage linked to licensing is that the regulations of granting a license recommend that the copyright owners of a certain product are motivated through receiving royalty for their performance and their innovative product. Therefore our innovation will actually receive explicit recognition over a larger market. Furthermore the aspect of tying to make certain that there is protection of intellectual properties rights can be attained through licensing, this implies that the business is actually well identified with its product. The basic requirement of licensing is that the product being introduced to the foreign market must be properly analysed by the recipient country. However the disadvantage of the procedure is that in most cases due to interference form the governing authorities it may sometimes be difficult for a foreign investing business to fully succeed, this is because many antitrust laws which hinder the expansion of foreign investors due to the various patens that are linked to the laws( Yi Shin Tang 76). Licensing is linked to the disadvantage that the business licensing can not determine the prise of the product, the likely chances of violation of the agreement in terms of the price of the product are very high. This therefore underpins the strategy. 3.1 Theories and concepts Linked to the selected organizational structure The reason behind backing the a wholly owned subsidiary in Spain is attributed to the theoretic concept that foreign subsidiaries form part of the industrial and innovation systems of a host country, therefore their innovative and economic performance impact the overall competitiveness and dynamics of their host country. If the company undertakes the wholly owed subsidiary structure in Spain the possibility of our product being integrated as part of the beneficial products to the countries economy is defiantly high. The integration process can not be attained for instance if we chose to export the product (George 57). Another major factor is attributed to the industrial organization theory which proposes that trade barriers that are imposed on countries act as an industrialization strategies should be imposed on all foreign investors. It is evident that most countries including Spain impose trade barriers to act as measures for protecting their local industries however through undertaking the wholly owned subsidiary such aspects would be avoided due to the fact that the business will be integrated as one of the supporters of the local industrial economy. In addition our innovative practice of building the revolutionary ski will be based in the country (Spain) there will therefore be no need for engaging in export trade. The other reason for selection of this particular structure is linked to the aspect of strengthening the development of ownership of the enterprise, which is highlighted by the (FDI) theory or the foreign direct investment theory. The implication of this is that the organization will be able to enhance its competitive advantage .It is evident that owing to the rapid advancements in technology , serious competition can be faced by the business especially when opening of a new market, and therefore result to a transfer of the companies assets at the international level. However due to the competence that is developed in an organizations product there are great chances of long term survival of the company within the selected foreign market. In deed I believe that our Ski product is the best and most innovative as a result are great chances of it surviving within the Spanish market and also other markets across Europe and Latin America (Daniel & Bradlow 63). The early foreign direct investment theory explains the growth and existence of any organization through the establishment of a subsidiary. The explanation includes benefits such as the ability to control and coordinate internal activities, ownership of priority knowledge and oligarchical power. If a foreign investing organization has these capabilities then it becomes liable to effectively compete with the existing firms in the country thus attaining more competitive advantage if its product is actually unique and cheaper than those in existence. In addition the aspect of technological spillover can be effectively controlled because the organization will have a chance to register the product in the foreign country as its own, as opposed to circumstances whereby if the business choose to export the product to Spain , and later other organizations may unlawfully imitate our brand. Mahoney (19) highlights that the international trade theory reflects on the various factors that influence the current trade pattern, FDI is one of the primary factors. The subsidiary structure can be fundamental in shaping trade patterns due to the fact that it is one of the most significant strategies of direct foreign investment. By undertaking the wholly subsidiary strategy in Spain our organization can actually easily expand the sale of the Ski to the targeted markets. This is because our business will be well equipped with the existing market trends. 3.1 Theories and Concepts for responding to International Business Issues The (FDI) Foreign direct investment theory proposes that one of the major issues in international business is the aspect of how a firm can enhance its completive advantage over other countries that engage in the same export business or even the local businesses in the country it has chosen to investment. It is important to take note of the fact that rather than putting much focus on trying to find strategies of enhancing competitive advantage of the product in a foreign country, it is essential to expand the international knowledge base. The process of expanding the knowledge base of an organization involves analysis of the investment nature of the current activities that exist at the international business level. Through the establishment of a wholly subsidiary stem our business can fully develop our knowledge base (Iglesias, 144). The absolute advantage theory gives suggesting that an organization should invest its services or products to a country in which it is more productive than. In the context of our investment strategy to Spain, it is evident the Australia has more advanced skiing activities as opposed to Spain which has not had many enterprises investing on the production of surf ski therefore our product will be highly lucrative in the Spanish Coast . It is however vital that for the organization to undertake effective planning before establishing a wholly subsidiary in Spain in order to avoid implications such as sabotage or other threats that may affect the market expansion (Ball 34). 4.0 Recommendations Madison International Company has a definite potential capacity of expansion. This is attributed by the fact that after undertaking a comprehensive market research the results have indicated that our newly formulated Surf Ski is actually a product that has not been outdone by any other product on the market, either nationally or internationally. If the organization implements the wholly owned subsidiary in Spain we will actually develop a competitive advantage over opposing firms and further attain market expansion which will further improve our performance in terms of our image and profits. As indicated by the analysis above it is evident the wholly subsidiary system outweighs the other two strategies; licensing and export. However before implementing the strategy it is essential for the organization to undertake in depth research on the Spanish market, in order to analyze the requirements required for setting up a wholly subsidiary part of the business in this particular strategic country. 4.1 Conclusion For a business to effectively venture in the international markets it requires to effectively examine the various strategies for undertaking its expansion plan. Being an organization that has a good inventory capacity and a product that can attract a large market through the revolutionary Surf ski the establishment of a wholly subsidiary is actually the most practical strategy of technological transfer. References Archibald, J. (2008).Theory and Practice of International Commerce New York; International book publishing company, pg 83. Ball, M. (1999). International Business: The Challenge of Global Competition, Irwin/McGraw-Hill, Pg 36-34. Daniel, D & Bradlow, Alfred, E. (1999). Legal Aspects of Foreign Direct Investment, Pg 555-67. Gillespie, R. (2007). "Spanish foreign policy: party alternatives or the pursuit of consensus?” Journal of Southern Europe and the Balkans.12. George, S. (1995) Total Global Strategy, Prentice Hall. Pg 56-70  Iglesias, M. ( 2007). "A Period of Turbulent Change: Spanish- Relations Since 2002". Whitehead Journal of Diplomacy and International Relations 8 (2): 113–129. Mahoney, M. (1998). International Business: A Managerial Perspective, Addison Wesley Longman,18-19. Richins, P. (1999). 50 Classic Backcountry Ski and Snowboard Summits in California: Mount Shasta to Mount Whitney. The Mountaineers Tony, L. (1995). The Strategic Partnering Handbook. McGraw-Hill Yi Shin Tang. (2002). The international trade policy and technology, Legal and economy. London; Oxford press. pg 76 Walf, D. (1993). Breaking the trade game, a small buines guide to exporting 98,1993, Diane publishing Read More